Recently, we reported that Curt Schilling’s 38 Studios was in financial trouble. Things have since taken a turn for the worst: on May 24th, all 379 employees received the following e-mail:

The Company is experiencing an economic downturn. To avoid further losses and possibility of retrenchment, the Company has decided that a companywide lay off is absolutely necessary.

These layoffs are non-voluntary and non-disciplinary.

This is your official notice of lay off, effective today, Thursday, May 24th, 2012.

This string of events has effectively given ownership of the company, the Kingdoms of Amalur IP, Project Copernicus, and anything else related to the State of Rhode Island. This, in turn, means that the state’s taxpayers are responsible for the $112 million deal after principal, interest, and taxes. Reports indicate that the studio borrowed approximately $50 million of the $75 million guarantee, and Schilling has stated that he will lose upwards of $50 million because of the failing company. The legitimacy of his claims are questionable, however: some statements say he invested closer to $30 million of his own money, and others claim that, regardless of what he invested, he pulled out $4 million of it just before they failed to make payroll. Governor Chafee has been asked about the discrepancy, but simply stated, “what we hear is different than what we can document right now.”

It has also been exposed recently that the studio may have illegitimately used the loan funding to pay mortgages for those who were part of its relocation program from Massachusetts to Rhode Island. Many who participated in the program had been told that the company had sold their old home, but since the layoffs they’ve received notice from their banks that their mortgage had not been paid. Looking further into the matter, it turns out that the homes had not been sold and were merely being paid off each month. The business closing means that these unfortunate people have been saddled with a second mortgage in addition to having no job.

State officials told Polygon that they were unaware of the issue, and an unnamed 38 Studios official has claimed the matter is being investigated.

Governor Chafee has been opposed to the initial deal for a long time. Even when the studio was in financial trouble, Chafee was opposed to giving the studio any more “easy” money. However, Schilling has since railed against Chafee, claiming his comments prevented the studio from obtaining private investment. Big Huge Games was apparently in pre-production for a sequel to Kingdoms of Amalur: Reckoning. An unnamed publisher was planning to invest approximately $35 million to allow the game to be produced, but seventy-two hours after Chafee’s public commentary, the publisher backed out. Former 38 Studios creative director Steve Danuser has also chastised Chafee saying, “he said a lot of things, he’s broken confidentiality. He’s done a lot of things to materially hurt us and I don’t understand it.”

The problems with the studio have also prevented a planned patch for Kingdoms of Amalur: Reckoning from being released. Lead designer Ian S. Frazier apologized for that:

“I wanted to apologize for the lack of a patch for Reckoning… It’s something we very much wanted to do, but various issues outside our control (which unfortunately I’m not at liberty to disclose) prevented us from doing so for a long time.”

The planned patches were to include two more difficulties, more camera features, and bug fixes.

Analysis: It pains me to see the employees of this company without a job, especially now that some are being burdened with the thought of having a possible second mortgage. However, it’s simply not possible to blame Chafee in this manner. The governor is doing exactly what needs to be done to ensure that Rhode Island sees the best possible outcome. That said, I do feel that there should’ve been an injunction to keep 38 Studios from laying everyone off. Because the company is now without employees, financial analysts are valuing it at a mere $20 million. There is no way Rhode Island is going to turn this around and come up positive. At this point, it’s all damage control.

But in an effort to show that the current Rhode Island government is not at fault, let’s take a look at the numbers: Kingdoms of Amalur: Reckoning sold somewhere between 1.1 to 1.2 million copies. Chafee has stated that, after looking at their financials, 38 Studios would’ve needed to sell twice that to break even. Assuming the best case scenario, 2.2 million copies is a lot for an RPG to sell. A typical best-seller RPG sells somewhere around 3 million. To sell above 1 million copies alone is a feat, but 38 Studios was shooting for AAA-title development and sales, a highly irresponsible thing to do for a non-established developer. To make matters worse, their next title was an MMO. MMOs are typically known for their high revenue from subscription sales as well as the physical disc sales. The problem with this is that development costs are so through-the-roof that it takes a little while to recover those costs, and a strong financial base is required before a company can feasibly produce one.

To put it bluntly, 38 Studios would’ve had a fine business model if they were Activision or EA. Unfortunately, they were a small-time start-up. Although Schilling did have a lot of money to help invest in the company, he simply could not have provided the budget needed for constant AAA development, not without at least one strong title to bring in constant revenue already.

I mentioned this in my previous article on the subject, but Schilling is also a stark hypocrite. He disapproves of Obama and had gone campaigning for Bush and McCain during the 2004 and 2008 elections bashing government funded expenditures, but he was perfectly willing to accept stimulus-funded taxpayer money to fund his ventures. Unfortunately, his charades here may ensure that politicians disapprove of the upcoming renewals for gaming industry tax credits. The industry has fought long and hard for those, and it’s a true shame to see someone screw it up so badly and publicly.

About Joshua Moore

Joshua has been a gamer for a long time, starting back with the NES as a child. Since then his interests branched from game systems to general electronics; an avid fan of technology and computers, Joshua graduated with honors from the University of South Florida and now holds a degree in Electrical Engineering. His favorite games include Valkyrie Profile, BlazBlue, Left 4 Dead 2, and Ocarina of Time. Additionally, he attends various BlazBlue tournaments and tries to pick up other anime or air-dasher fighters whenever possible.